Final answer:
From an underwriting standpoint, a property where combustible materials are stored in the furnace room is considered a High-risk property, due to the increased danger of fire or explosion. Insurance companies may offer lower rates for properties with top-level security and fire sprinkler systems that undergo regular inspections.
Step-by-step explanation:
An applicant for property insurance who owns a building where combustible materials are stored in the furnace room would likely be considered a High-risk property from an underwriting standpoint. This is because the storage of combustible materials in an area like a furnace room presents a significant hazard that could lead to a fire or explosion. Insurance companies prefer to insure properties that maintain a minimum level of security and fire sprinkler systems, as these can mitigate some of the risks involved and reduce potential losses.
While insurance providers cannot eliminate moral hazard, they make efforts to minimize its effects through investigations to prevent insurance fraud and by monitoring behaviors that increase risk. A business can potentially receive lower property insurance rates if the business installs top-level security and fire sprinkler systems and commits to annual inspections of these systems, suggesting a proactive approach to risk management.